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If interest on capital is omitted, what will be the effect on the remaining profit?

Answer and explanation

Correct answer: Remaining profit will appear higher

Interest on capital is an appropriation item deducted before distributing profit. Omitting it understates appropriations (or expenses) and so the remaining profit shown will be higher. The closest distractor B is wrong because omission reduces the deducted amount — it does not increase deductions to make profit lower. Exam tip: Always prepare the Profit & Loss Appropriation Account and list "Interest on Capital" explicitly to avoid this mistake.

Related tags

Partnership AccountsInterest On CapitalOmissionErrorProfit DistributionAdjustmentsPartnership Accounts Basic ConceptsAccountancy

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